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Lex Mercatoria

Can the Principles of European Contract Law be regarded as constituting an autonomous lex mercatoria or, if not, can they be regarded as part of a universal lex mercatoria?

Introduction

In this answer we will discuss about consideration of the principles of European contract law as autonomous lex mercatoria or universal lex mercatoria. Further we will discuss about the recognition of lex mercatoria

Before regarding the principles of European contract law as autonomous lex mercatoria or universal lex mercatoria, it is necessary to clarify lex mercatoria and what are autonomous and universal lex mercatoria?

Lex Mercatoria

Informal norms that possess some of the attributes of law are neither a new nor uncommon phenomenon. Law creation predates the emergence of the modern state, and history provides many examples of customary societal or communal norms that did not emanate from a particular institutionalized sovereign. The most common example from previous centuries is the medieval law merchant or lex mercatoria, namely the customs followed by merchants in transnational, and often intra-national, commerce. The emergence of the modern state did not displace these customs. Modern legal systems have not only sanctioned previously developed customs, but have also allowed room for their development in the future[1].

LEX MERCATORIA is derived from the Latin. Where ‘'lex'' means ‘'new'' and ‘'mercatoria'' means ‘'merchant''. Originally, lex mercatoria was a bundle of rules and regulations, which was established by the European merchants themselves during the medieval ages, for the effective regulation of their trade practices. The law merchants established lex mercatoria since there were differences between there codification of the customs and principles of the law merchant into traditional legal regimes, terminologies, enforcements etc.

According to Goldman, ‘'Lex Mercatoria may be understood as “a set of principles, institutions and rules from different sources that constantly nurtures the legal structures and the specific activity of the collectivity of those operating in the international trade”.[2]

According to Ole Lando, ‘'Lex Mercatoria is a thin body of law, which consist of the rules of international conventions and uniform laws and of international custom and usages and of the common core of legal system. The Parties can boot out the technicalities of

National legal systems by enforcing lex mercatoria and they avoid rules which are unfit for international contracts''.[3]

According to Fernando, ‘'Lex Mercatoria has been commonly understood as the fundamental component of a legal category, which has been given the name of Transnational Law as it intertwines universally accepted legal norms and which are understood to be included in most of the existing legal systems. In this sense it has been argued that this notion stems from “certain rules of behavior which the members of the societas mercatorum have recognized a universal character and acceptance.[4]

According to Keith Heghet, Lex mercatoria means more or less the principles of developing transactional or international law merchants, capable of being applied by decisionmakers(judges and arbitrators) as a source of legal rule, in order to give consent to decisions, in much the same way that the decisionmakers would apply a legal system such as lex fori and lex loci arbitri*.[5]

As Julian Lew notes, “This system of law, the lex mercatoria comprises the rules which have been developed to regulate and facilitate international trade relations and the customs and practices which have attained universal (or at least very extensive) recognition in international trade”.[6]

We can define ‘'Lex mercatoria'' as a non- national unique set of international rules which contains customs and usages. By applying the Lex mercatoria the parties, in the contracts, escape the rules and regulations of the domestic laws as well as international laws as well as they can oust the peculiar difficulties of domestic laws which are not renowned by other countries. This concept of Lex mercatoria has always been controversial since the medieval roman times. Furthermore, those involved in the proceedings—parties, counsel and arbitrator— they can plead and argue on an equal footing, so that nobody has the advantage of having the case pleaded and the case decided by rules and solutions which appears most appropriate and equitable, so that nobody has the feeling like a handicap of seeing it governed by a foreign law.[7]

Infact,the main arbitration institutions, especially concerned with the need for flexibility in international arbitration, have also certified the position of transnationalists by allowing arbitrators to apply 'rules of law' such as lex mercatoria to resolve international commercial disputes.[8] This reference to 'rules of law', which can be found in the modern arbitration laws and it clearly allows the parties arbitrator to choose a non-national law or lex mercatoria.

PRINCIPLES OF EUROPEAN CONTRAC LAW (hereinafter called PECL)

The PECL is constituted by the Commission of European contract law, a body of intellectual people with majority of lawyers, drawn from 12 member states of the European Union, under the Chairmanship of Ole Lando*. PECL Part 1 and II was published in 1999 and Part III was published in 2003. PECL Part I and II has contained 131 Articles divided into 9 chapters, most of them dealing with a specific topic: The first chapter contains General Provisions, Formation of Contracts(Chapter2), Authority of agents(3), Validity(4), Interpretation(5), Contents and effects(6), Performance(7), Non Performance and Remedies in general(8) and Particular Remedies for Non-Performance(9).

The Principles previously published in Part I (1995)[9] are included in a revised and re-ordered form. Part III covers plurality of parties, assignment of claims, substitution of new debt, transfer of contract, set-off, prescription, illegality, conditions and capitalisation of interest.

PECL is an independent and different law from any national law. PECL seems like the UNIDROIT principles in way of its general statements and standard of the provisions, but PECL are much broader and autonomous.[10] PECL are very similar to the UNIDROIT* Principles which are intended exclusively for commercial contracts. Although the PECL cover more topics and although there are a few minor differences between the solutions chosen for the different sets of principles, the questions must be asked whether it's worth to create two sets of principles. The fact that there are two set of principles can possibly be justified by their partially different purpose. . Whereas the UNIDROIT principles are meant for commercial contracts[11], while the PECL cover all the contracts. In some respects the Principles may be compared with the American Restatement of the Law of Contract, which was published in its second edition in 1981.Like the Restatements the articles drafted are supplied with comments and notes. The Restatements consist of non-binding rules, "soft law". They purport to restate the Common Law of the United States. The Principles are also "soft law", but their main purpose is to serve as a first draft of a part of a European Civil Code. Furthermore a common law does not to exist in the European Union. The Principles has therefore been established by a more radical process. No single legal system has been their basis. The Commission has paid attention to all the systems of the Member States, but not every of them have had influence on every issue dealt with. The rules of the legal systems outside of the Communities have also been considered. So have the American Restatement on the Law of Contracts and the existing conventions, such as The United Nations Convention on Contracts for the International Sales of Goods (CISG). Some of the Principles reflect ideas which have not yet materialised in the law of any state. In short, the Commission has tried to establish those principles which it believed to be best under the existing economic and social conditions in Europe.[12]

The Purpose of PECL

A Contract is agreement-giving rise to obligations which are enforced or recognised by the law. The Factor which distinguishes contractual obligations from other legal obligations is that they are based on the agreement of the contracting parties. The PECL is based on the need of commercial convenience. The law is often concerned with the objective appearance, rather than with the actual fact. Considerable uncertainty would result if A, after inducing B reasonably to believe that he (A) had agreed to certain terms and conditions, could then escape liability merely by showing that he had no real intention to enter that agreement. However, If B knows that A had no intention to contract with him or to contract with the terms alleged. A subjective element thus qualifies the objective principle and this follows from the purpose of that principle, which is to protect B from prejudice, which he might suffer as a result of relying on a false appearance of agreement. The idea that the contractual obligations based on agreement must be qualified in relation to the scope of the principle of freedom of contract and the principle of good faith. The Commission on European Contract Law has responded to the need for the uniformity of law through PECL. PECL are aimed at restating European Contract Law while at the same time accommodating other future developments. There are many benefits of PECL, as a base for harmonisation, it facilitates the cross border trade within Europe, it strengthens the Single European Market, it is a modern formulation of Lex Mercatoria, and it is a model for judicial and legislative development of contract law.[13]

PECL as Autonomous lex mercatoria

This is from the Greek: “Auto-Nomos”. “Auto” meaning “self”, and “nomos” meaning “law”. “Autonomy” is, thus, one who gives oneself its own law, as in self-made law.

The evolution of an autonomous law of international trade, founded on universally accepted standards of business conduct, would be one of the most important developments of legal science in our time.[14] PECL constitutes a common platform for commercial lawyers from all countries, those of planned and free market economy, those from civil law and common law, and those of fully developed and developing economy, which would enable them to co-operate in the perfection of the legal mechanism of international trade.

During the last decades, arbitration has become a commonly employed mean of solving problems as Arbitrators played, and continues to play, a crucial role in international trade in dispute settlement since the starting of the trade practices. PECL also serves arbitration and arbitrators. Arbitrators are often in search of the general principles of law. In conflict solutions, arbitrators look at the general principles of law instead of going by the laws of particular system. Arbitrators have encouraged developing such kind of lex mercatoria and they often feel the need for it. Arbitrators are being reluctant to apply PECL as generally accepted principles of commercial law in international arbitration. This may be due to their relative novelty, to the fact that their scope is limited to the European Union or to the strong materialism and esprit collect if which manifests itself by the prominent role of the good faith principle and by a social regulation of the contract which may be dubious in an international context.

Acceptance of PECL as autonomous Lex Mercatoria in International Trade

The adherence and acceptance by national courts of the applicability of lex mercatoria as substantive law plays a big role in its recognition as an autonomous legal system. Various countries around the globe have different ideologies of law and acceptation of a foreign system of law that has not been formulated by the sovereign power of a state in some countries is inconceivable. National courts in most instances inevitably link circumstances such as, place of contracting or the place of business of party performing the contract to the determination of the law governing the contract.

Earlier, English Court of Appeal has noted that the law that should be administered is the law of the land and not principles that have been formulated by arbitrators on a case by case basis.[15] The decisions of the judges of the English courts in favour of English law over general principles of law was reaffirmed in the judgment of Orion Cia Espanola de Seguros v Belfort Mij.[16] The court made the conclusion that it is the policy of the law in England that in their conduct arbitrators must in general apply a fixed and recognized system of law which they noted is inevitably English law.[17] However in the 1970's the attitude seemed to changed, judges were seen to be less rigid on the application of English law. In the Eagle star case[18] Lord Denning MR held that the dictum in the Orion case above was not correct. He noted that with a clause in the contract that required arbitrators not to be bound by strict rules of law, instead were required to make a decision in accordance to an equitable rather than a strictly legal interpretation of the provisions of the agreement, does not render the contract void as was held in the Orion case; it does so only on the ground that it is contrary to public policy. In the present case it was the view of Lord Denning that the contract was perfectly okay.[19] Attempts to reconcile the decisions Eagle Star and Orion were made in DST v Rakoil [1987] 2 Lloyd's Rep 246 where the court was faced with the determination of the validity of equitable clauses. [20]

He notes that the position was cleared up by the court of appeal in the Shamil Bank case[21] where the court was faced with a contract where the Parties had chosen a combination of English and Sharia law to govern their contract. Where there is a question as to the law governing the contract English law looks to the Rome Convention.[22] This is as a result of the statutory force given to the Rome Convention by the Contracts (Applicable law) Act of 1990. The Convention gives parties the right to choose the law governing their contract under article 3. Court of Appeal in the Shamil Bank Case held that the Rome Convention does not contemplate the choice of any other law other than that of a country. This in effect means that the choice of lex mercatoria as law governing the contract does not bind English courts.

It is argued that this reasoning contradicts the principles applied in cases such as

General Builiding & Maintainance plc v. Greenwich Borough Council [1993] 65 BLR 57, 62-65 and Ballast Nedam Group NV v. Belgian State [1997] 88 BLR 32 (ECJ) that United Kingdom legislation giving effect to EU legislation must be interpreted so as to give effect to its purpose rather than its strict wording. Thus, The conclusion is that the Shamil Bank case was concerned with the issue whether English courts are permitted to apply the parties' choice of transnational Commercial law and not whether arbitrators are free to do so.[23] This was held in the case of Halpern & Ors v. Halpern & Anor [2007] EWCA Civ 291 paragraph 38 where the court noted that; ‘if parties wish some form of rules or law not of a country to apply to their contract, then it is open to them to so agree, provided that there is an arbitration clause. The court will give effect to the parties' agreement in that way.'

Moreover, In the Arbitral award of case no T-9/07, of Foreign Trade Court of Arbitration attached to the Serbian Chamber of Commerce, the Arbitral Tribunal decides also to apply PECL in harmonisation with UNIDROIT Principles.[24] Furthermore, in another case Gabino vs Porta de las Germanies S.A., Spain, Case number 126/2009, recently applied PECL for the termination of contract for fundamental breach.[25]

PECL not an universal lex mercatoria

Supposition and opposition are the part and parcel of the law. Few thinks in favour and rest thinks against it. There are the supporters who view the lex mercatoria as an autonomous global legal order and evidence of private law-making that is independent of any national sovereign.[26]

Likewise, few thinker opposed PECL. According to its opponents PECL cannot stand universally, since the substantive differences between the European systems of private law are considerable, especially between the common law of England and Ireland and the civil law of the other countries. Moreover, Standardisation of the substantive law of contract is not necessary. In the Convention on the Law Applicable to Contractual Obligations,the EU Member States have already standardised the international law of contract (rules governing conflicts of laws), thereby ensuring the requisite legal consistency. There are countries that consist of several judicial territories, each with its own law of contract, such as the United Kingdom, Canada and the United States of America. This not only applies to England and Ireland, where the people, and particularly the lawyers, proudly cherish their common-law tradition, but also in France, where theCode Napoléonis regarded as a cornerstone of the nation's cultural heritage. Furthermore, its opponentsmaintain that alex mercatoriacannot be valid for the simple reason that it is not backed by governmental authority. No legislature has adopted or ratified it. Moreover, Even if some general legal principles like PECL and other 'international sources of law' could be identified as parts of alex mercatoria, it would not be desirable, for political and other reasons, to use it as the basis of an arbitral award. Thelex mercatoria, according to its opponents, is an indefinite and unbounded 'source of law'. Consequently, in their view, every arbitral award and every judgment by a state court must be founded on national law.[27]

Again some opposed it as this non-state positive law emerged from a variety of functionally uniform international commercialpractices. In the opposing camp are the critics of the lex mercatoria. This group proclaims the sovereignty of nation states and attacks the lex mercatoria as yet another legal fiction.[28]

Although there is no universal definition of lex mercatoria, there is a general consensus that it must not be identified with equity or amiable composition. Lex mercatoria is allegedly a law, and arbitrators are not expected to try to reach a fair result when deciding the dispute.[29]

Why Autonomy

First of all it is necessary to clarify the concept of autonomous legal order for determining whether lex mercatoria complies or not.

Due to the fact that that branch oflawis founded on the autonomy of the parties' will, freedom of contracting enables those engaged in international trade to overcome the historical peculiarities of the various national systems oflaw. Now a day's States erode their laws through the action of states themselves, by implementation of uniform rules. This may help the states to modernise their laws. Through freedom of contract in commercial affairs, states have provided parties with comprehensive autonomy in the organisation of their commercial affairs, with the exception of course of mandatory law. If state law does not suit the demands of the business community, they are free to go elsewhere. Businessmen can and do limit the role of the state in their contractual relations, seeking more globally applicable and uniform solutions. Responding to this demand there are various international institutions and service providers that are sensitive to the needs of the business community that increasingly target the contracting parties as representing an alternative means of unifying "law" and providing global solutions.[30]

In this way a new,autonomouslawis being developed in practice, expressed in model contracts, standard clauses, general terms of delivery, commercial customs and trade usage. The causes for the emergence of anautonomousinternational commerciallawseem to lie in the diversity and inadequacy of many traditional national systems oflawin the changed circumstances of modern international trade.

The causes for the emergence of anautonomousinternational commerciallawseem to lie in the diversity and inadequacy of many traditional national systems oflawin the changed circumstances of modern international trade. It is beyond doubt that in the arbitral settlement of disputes in international trade the universal recognition and confirmation of the two fundamentalprinciplesof freedom ofcontractandpacta sunt servandais an accepted fact.

The national court-systems are not allowed to apply non-state-law. Only arbitral tribunals under certain arbitration laws may do so, if the parties have chosen to subject their dispute to general principles of law and the like. Currently there is a trend of recognizing that the notion of legal order is not limited to a national law; thus we find that the regulations from the most important arbitration institutions in the world provide that a given legal relation may be governed by the most suitable “rules of law'', such as lex mercatoria and the new PECL. In International commerce, the transacting communities need to find out a way to cope out the problems relating to international transactions such as numerous legal systems whose rules are expressed in a multitude of languages. Lex Mercatoria will necessary be related to the legal orders of each country as the principles, as the Lex is subordinated to state concessions since it does exists and does have an entity on its own due to the international trade activity , which has produced the principles applicable to business transactions.[31] The nationalization of mercantile law, including international sales law, occurred in the nineteenth century. During this period, states began to codify commercial law rules into national legislation. They decided to take full control over international trade and developed new laws to regulate all aspects of economic relations between commercial parties.

The complexity of the rules of private international law, and the obsolete character of domestic laws, failed to satisfy the business community's need for simplicity and predictability in crossborder trade. In particular, conflict of law rules often produced results that appeared arbitrary and impractical. It also became recognized that national laws were primarily enacted to govern domestic transactions and often failed to address the unique requirements of international transactions. The end result was the impairment of global trade. The establishment of the ICC and UNIDROIT earlier and now PECL reflected the

renewed interest in—and rediscovery of—the historical, cosmopolitan character of commercial law and the desire on the part of international merchants to free themselves from the restrictions of national law. States began to address this dissatisfaction by introducing international conventions and model laws in the effort to harmonize private international law across borders.[32]

Conclusion

I think, In International Commercial Arbitration, there is no need to localise issue, as many transactions and legal relationships have contacts with several jurisdictions and are truly international and de-nationalised. It is appropriate for an arbitrator to find some international or non national rules and thus PECL fulfils this properly. So applying PECL in international commercial arbitrations or in the international transactions actually constitute an autonomous LEX MERCATORIA as an advantage to the international commercial arbitrations along with its many other advantages from the point of view of the international merchants.

we may hold that the lex mercatoria contains the main features of an autonomous legal order given that the definition methods of its contents encompass a set of coherent legal rules, grouped under the denomination of “PECL” which propose analogue solutions for similar cases, whose utilization enables the resolution of most disputes put forward for the consideration of the judges in charge of the application thereof

Earlier Lex mercatoria has not been widely considered as desirable choice of applicable law, when lawyers advise their clients on a contractual choice of law, they recommend selection of a definitive and provable law. By these criteria, lex mercatoria simly has not stood up. The problem is both in its ‘'provability'', and in finding a comprehensive set of principles within lex mercatoria.[33] But the publication of UNIDROIT principles earlier and now PECL makes it worthwhile to take a look on it.

In the modern world, the idea of the persuasive force of a compilation of legal principles, definitions and rules, derived from comparative research, has been adopted by a number of influential working groups operating at a global or regional level. The "UNIDROIT Principles of International Commercial Contracts (UPICC)" and the "Lando Principles on European Contract Law (PECL)" are the most prominent results of these efforts.

Quite apart from the possibility that a national law may be undesirable or unacceptable, PECL can be operated as an autonomous lex mercatoria more fairly, since it is not tied to either trading parties home laws nor it is any single third country's law. Another potential advantage to the widespread use of PECL would be the lower transaction costs associated with trade conducting according to its terms, since it is actually consist of uniform principles and uniformly applied.

In recent years, there has been considerable progress in the quality of these norms, especially as exemplified in the PECL and UNIDROIT Principles. However, as much as we should applaud this progress, we should not allow the euphoria generated by a couple of successful codifications of non-state norms to lead us into accepting the view that all nonstate norms are a panacea for all ills, or that state laws or borders are the enemy.

While it is perfectly legitimate to resort to history and invoke the old lex mercatoria in order to explain and allay fears against the new lex mercatoria, the analogy can only go so far. As its name reminds us, the old lex mercatoria was limited to merchants. As noted earlier, despite its name, much of the new PECL and lex mercatoria is not so limited.

The Principles of European Contract Law have been inspired by the ideals of peace, prosperity, and justice for the peoples of Europe. We embrace that ideal of promoting the solidarity of the peoples of Europe. Given the equally important ideal of respecting the diversity of national traditions and cultures, the realisation of those ideals has required complex experiments in forms of multi-level governance. The resulting institutional arrangements have not always proved adequate to this task. But the experiment continues; we can learn from mistakes; and we can chart new routes towards the better achievement of our goals.

BIBLIOGRAPHY

Articles

Barton S. Selden, ‘'Lex Mercatoria In European and U.S.Trade Practice: Time to take a Closer Look'', Annual Survey of International and Comparative Law, Vol. 2:1

[8] Antonio Hierro,Miguel Angel Malo ,Cuatrecasas ,The European & Middle Eastern Arbitration Review 2009,Pp20. available at http://www.cuatrecasas.es/Web/PDF/lex_mercatoria_ahierro.pdf . (accessed on 30th March 2010) *Ole lando is Chairman of the Commission of European Contract Law and Professor emeritus of the Copenhagen Bussiness School.

[9] Lando & Beale (eds)Principles of European Contract Law, Part 1. Performance, Non-performance and Remedies, Dordrecht 1995. Available at http://frontpage.cbs.dk/law/commission_on_european_contract_law/survey_pecl.htm.

[10] Bo­nell, M.J., The UNIDROIT Principles of International Con­tracts and the Principles of European Contract Law: Similar Rules for the Same Purposes?, Uniform Law Review 1996, Pp. 229-246.

*International Institute for Unification of Private Law (UNIDROIT), Rome (1994). 11 By M.W.Hesselink, G. J. P. de Vries, Principles of European contract law: Some Choices Made By Lando Commission,2001, Pp 44.

[11]

[12] Ole Lndo, Purpose of PECL: An Alternative to or a precursor of European Legislation,(1992), 40 The American Journal Of Comparative Law, P p579.